GLOBAL - State Street Corporation has become the latest global custodian to provide qualified foreign institutional investors (QFII) access to China's US$500bn A-share market.
The move will allow foreign investors to purchase domestic Chinese securities for the first time. Previously, foreign investors were restricted to B-share market investments, a state-owned enterprise. QFIIs include fund managers, insurance companies, securities companies or commercial banks which are permitted to invest in A-shares and treasury bonds listed on the Shenzhen and Shanghai stock exchanges.
Mary Fenoglio, executive vice president of State Street, said: With the establishment of custody servicing for China’s A-share market, we are underscoring our commitment to supporting our clients’ investment strategies on a global scale.
“Through this effort, we offer a distinct advantage to clients wishing to participate in new investment opportunities as soon as they emerge.”
State Street, which has some US$7.9trn in assets under custody worldwide, has also received approval to perform sub-custody functions for A-shares.
Both HSBC and Citibank received the go-ahead from Chinese regulators in March.
China hopes to attract long term investment from top level institutional investors such as broker dealers and fund managers into A-shares, government bonds and convertible bonds.
But Omar Negyal, fund manager, Pacific equities, for F&C Management UK, urged some caution over the region saying that China’s domestic markets, the Shenzhen and Shanghai exchanges, are overvalued.
“They've got high price/earning rations and equity is overvalued at the moment,’ he said.
“It is quite a risky market.”
F&C is considering involvement in certain stocks in Shanghai. Currently, the firm’s regional investments are in Hong Kong listed stocks “where valuations are much lower.”
Negyal also pointed to holes in corporate governance, the negative state of the banking sector and the potential effects of the SARS virus.
“Regarding corporate governance, a lot of the companies are still majority owned by the government. Although there has been some improvement in this area there is still a long way to go.”
Negyal believes that government efforts to stimulate investment by encouraging private companies to list has resulted in some increased reporting.
China’s banking sectors is another sore point. State banks, which still dominate lending, were previously used as policy banks, leading to several bad loans.
“Although the government has done quite a lot to improve the banking system there is still a lot of policy lending going on which is negative for the whole of the economy. And if you don't have efficient pricing of risk then the issue of trying encourage private investment doesn't really tally,” said Negyal.
On SARS, Negyal believes that the affects are negative in the short-term but that any future miscommunication by the government could alienate both investor and corporate sentiment in the long-term.
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